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Gold hit nearly four year low on Friday due to wary investors unwinding their positions ahead of possible "sooner than expected" interest rate hike in the United States.
With indications of recovery in the US economy which was supported by the Fed's move to withdraw quantitative easing (QE) completely, traders offloaded their positions as their immediate response.
Gold recovered a bit and was last trading $1175.2 an oz after hitting the low of $1170.5 an oz, around $30 decline from previous close of $1199 an oz on Thursday.
"The bullion has breached previous crucial support level of $1180 an oz and therefore, miners and sovereign nations have started hedging. Consequently, further decline cannot be ruled out. Gold, therefore, may see the next initial support level of $1145 an oz and then, $1100 an oz thereafter after breaching the first support level," said Gnanasekar Thiagarajan, Director, Commtrendz Research.
On the Multi Commodity Exchange (MCX), gold hit almost 18-month low to trade at Rs 26071 per 10 gms for near month delivery.
The FOMC (Federal Open Market Committee) in its statement dated 29th October 2014 said there has been a considerable improvement in outlook for the labour markets since the beginning of asset purchase program.
The Committee estimates that there is sufficient underlying strength in the economy to support ongoing progress towards maximum employment in respect to price stability.
However, the central bank is maintaining its existing policy of reinvesting its principal payments from holdings of debt and asset backed securities agencies along with rolling over maturing treasury securities at auction. This policy will keep the holdings of longer term securities at sizable levels and may help to maintain accommodative financial conditions.
"We expect gold prices to trade lower owing to strength in the dollar index after the Federal Reserve ended its asset-purchase programme. Also, plunge in SPDR gold holdings will act as a negative factor," said Prathamesh Mallya, Sr. Research Analyst, Angel Commodities Broking.
The FOMC meeting in September hinted that economic growth has been expanding at a moderate pace. Labour market in the US has improved somewhat further on the back of readings of solid jobs gains and lower unemployment rate.
The monthly bond purchases which stood at $85 billion till December 2013 was scaled back by $10 billion each in the last eightmeetings (i.e. Dec'13, Jan'14, Mar'14, Apr'14, Jun'14, Jul'14, Sep'14 and Oct'14) and currently stands at nil.
The Federal Reserve decided to scale back the final round of its bond buying programme. The central bank decision to go further with its end of QE program was due to expectations that underutilization of labour resources if gradually diminishing.
Household spending is increasing moderately and fixed investment in business in advancing but recovery in the housing sector is at a slower pace. Inflation has been running below the central banks longer run objective, however inflation expectations for longer term has been stable.
Silver has also seen selling pressure. Silver prices hit $16 an oz in the international market translating thereby, at Rs 35620 a kg on the Multi Commodity Exchange (MCX) for near month delivery.
Thiagarajan said, unlike gold, silver has more potential for upside and limited potential for downside.
